Investing – Sizemore Insightshttp://charlessizemore.com
by Charles Lewis Sizemore, CFAFri, 16 Nov 2018 13:59:45 +0000en-UShourly1https://wordpress.org/?v=4.9.8Stocks for the Beginner Investorhttp://charlessizemore.com/stocks-for-the-beginner-investor/
http://charlessizemore.com/stocks-for-the-beginner-investor/#respondFri, 16 Nov 2018 13:59:45 +0000http://charlessizemore.com/?p=13850The following first appeared on Kiplinger’s as 5 Great Stocks to Buy If You’re New to Investing The biggest challenge for many new investors is simply knowing where to start. There’s no clear consensus on how to invest. Value investors will say the best stocks to buy are cheap ones and rattle off plenty of […]

The biggest challenge for many new investors is simply knowing where to start.

There’s no clear consensus on how to invest. Value investors will say the best stocks to buy are cheap ones and rattle off plenty of statistics to defend their stance. Growth and momentum investors will counter that investing in dominant growth stocks is the way to go. After all, you’re not too likely to find an all-star like Amazon.com (AMZN) sitting in the bargain bin.

What about dividends? Or share repurchases? Various studies have shown that focusing on these factors can generate solid returns.

Despite all the attempts to quantify investing, it is often more art than science. No single strategy is right for all investors. Some excel at charting and other forms of technical analysis, while some fundamentalists find bargains by digging into the minutiae of the financial statements. And there’s everything in between.

The best way for beginning investors to learn is to try a little of everything. You don’t have to get it right the first time, and you don’t have to put your capital at serious risk. So today, we’re going to look at five of the best stocks to buy if you’re new at investing. These may or may not beat the market over the next year. It would be fantastic if they did, but that’s not our point here. We’re simply looking to learn the ropes.

I’ll start with one of the very cheapest stocks in the market.

Value investing has trounced all other disciplines of investing over the years, at least according to several academic studies such as Fama and French’s landmark 1992 paper “Common Risk Factors in the Returns on Stocks and Bonds.”

But there is no such thing as a free lunch. While value stocks may outperform over time, they can be painful to hold. Sometimes cheap stocks keep getting cheaper.

Consider automaker General Motors (GM), which trades for about $34 per share. It’s one of the cheapest large-cap stocks in America right now, trading for just 5.5 times expected 2018 earnings and 0.3 times sales. To put that in perspective, the Standard & Poor’s 500-stock index – a group of 500 companies considered to be reflective of the American economy – trades for 18 times expected 2018 earnings and 2.3 times sales.

However, GM also looked cheap by these same metrics back in July, when it traded for more than $44 per share.

Value investing can be frustrating, but General Motors is worth a try. GM clearly is undervalued by most traditional metrics, and you’re being paid to wait while Wall Street figures that out. GM pays a 4.4% dividend, more than twice what the average S&P 500 company pays out right now.

]]>http://charlessizemore.com/stocks-for-the-beginner-investor/feed/0Investing In Latin Americahttp://charlessizemore.com/investing-in-latin-america/
http://charlessizemore.com/investing-in-latin-america/#respondThu, 21 Jun 2018 12:10:01 +0000http://charlessizemore.com/?p=13728The following is an excerpt from 7 Top Latin American Stocks to Buy, originally published on Kiplinger’s. Brazilians have a tongue-in-cheek saying about their country. Brazil is the country of the future… and it always will be. That’s probably a little unfair. Brazil and Latin America in general have grown and modernized to the point […]

Brazilians have a tongue-in-cheek saying about their country. Brazil is the country of the future… and it always will be.

That’s probably a little unfair. Brazil and Latin America in general have grown and modernized to the point that their economies are barely recognizable to those who remember the commodity-driven economies of decades past. Latin America is highly urbanized and has a vibrant and growing middle class.

All the same, the region still has a long way to go to meet developed world standards. For example, per capita income in the United States, Germany and France is $59,495, $50,206 and $43,550, respectively, according to recent estimates by the International Monetary Fund. In contract, Chile – the wealthiest country in Latin America – has per capita income of just $24,558, slightly below Turkey and slightly above Croatia. Argentina and Mexico weigh in at about $20,000 each.

Rome wasn’t built in a day, and it will be a long time until these countries approach developed-world living standards. All need major investments in education and infrastructure to make that happen, and these take time.

In the meantime, intrepid investors looking to get a piece of that growth have abundant options at their disposal. Latin America is home to dozens of world-class companies that stand to benefit from the continued growth in the region. Today’s we’re going to look at seven solid Latin American stocks that you can hold for the long-term. The list is more heavily weighted to Brazil and Mexico, as these countries have the deepest capital markets and the broadest selection of liquid public companies. But up and coming growth darlings like Colombia and Peru are included as well.

Apart from Colombia, Latin America’s brightest star of the past 20 years has been Peru. Like Colombia, Peru has its share of domestic unrest. In the 1980s, Peru was essentially a failed state. But in the years that have passed, the country has managed to restore law and order and has adopted solid growth policies.

The problem with investing in Peru is its lack of large, liquid stocks. The handful of Peruvian stocks with healthy trading volume tend to be clustered in the metals and mining sector.

There is, however, one large-cap Peruvian stock that gives broad-based exposure to the growing Peruvian economy: Creditcorp (BAP), a banking group with an $18 billion market cap.

The group’s Banco de Credito de Peru is the country’s largest retail bank and the natural choice for many middle class and wealthy Peruvians. But the group is also active in tapping the needs of working-class Peruvians via microfinance leader Mibanco and has vast insurance and wealth management wings as well. You can think of Creditcorp as a one-stop shop for Peruvian finance.

As we were reminded in 2008, finance can be a volatile sector. But Creditcorp has managed to survive and thrive through booms and busts and everything in between. If you believe in the long-term Peruvian growth story, Creditcorp is your best option.

]]>http://charlessizemore.com/investing-in-latin-america/feed/0MLPs That Should Crush the Market in 2018http://charlessizemore.com/mlps-that-should-crush-the-market-in-2018/
http://charlessizemore.com/mlps-that-should-crush-the-market-in-2018/#respondWed, 23 May 2018 02:23:41 +0000http://charlessizemore.com/?p=13710The following is an excerpt from 5 MLPs That Should Crush the Market in 2018. For a collection of companies that tend to own boring, cash flowing assets, it sure has been a wild ride in master limited partnerships. On a total return basis (including dividends), the Alerian MLP Index — which is heavily weighted […]

For a collection of companies that tend to own boring, cash flowing assets, it sure has been a wild ride in master limited partnerships.

On a total return basis (including dividends), the Alerian MLP Index — which is heavily weighted to the largest midstream oil & gas pipeline operators — doubled in value between the fourth quarter of 2010 and its all-time high in the fourth quarter of 2014.

Unfortunately, it all went downhill quickly. Encouraged by low interest rates and high energy prices, the pipeline companies borrowed heavily to finance their growth projects while distributing virtually all of their cash flow from operations as cash distributions. When crude oil started to tumble in 2015, the banks and bondholders got jittery and even some of the largest players found themselves effectively locked out of the capital markets.

Before it was over, the distribution growth that investors found so attractive went into reverse. Many MLPs froze their distributions and several actually had to slash them.

But those rough years helped to create the fantastic opportunity we have today. As a sector, MLPs got their leverage under control and started funding their growth projects with internally generated cash flow rather than new debt. This brings the sector more in line with “normal” public company behavior.

With firmer energy prices and more stable financing, MLPs are getting their growth mojo back, yet prices don’t fully reflect that reality, at least not yet.

So, today we’re going to take a look at five MLPs that I expect to deliver market-crushing total returns in the years ahead.

Today, ETE is the linchpin in an energy infrastructure empire with over 71,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines.

Energy Transfer’s structure can be a little confusing to the uninitiated. Energy Transfer Equity is the general partner of two other MLPs: Energy Transfer Partners LP (ETP) and Sunoco LP (SUN), which distributes fuel to gas stations in over 30 states.

This complicated structure has become something of a liability to the company in an era in which investors demand more transparency. Furthermore, the company really hurt its reputation when it tried to buy Williams Companies (WMB) back in early 2016 … before changing its mind and resorting to questionable means to terminate the deal.

That’s OK. I like companies that have a little egg on their face, as we can often get them at a good price. Today, ETE is no exception. It yields a solid 7.2% and, after a short hiatus, started growing its distribution again last year.

]]>http://charlessizemore.com/mlps-that-should-crush-the-market-in-2018/feed/0Is Value Dead?http://charlessizemore.com/is-value-dead/
http://charlessizemore.com/is-value-dead/#commentsWed, 16 May 2018 17:24:08 +0000http://charlessizemore.com/?p=13708Value investing has historically been a winning strategy… but it’s been a rough couple of years. So… is value dead? Should we all just buy the S&P 500 and be done? The rumors of value’s death have been greatly exaggerated. Larry Swedroe wrote am excellent piece on the subject this month, Don’t Give Up On […]

]]>Value investing has historically been a winning strategy… but it’s been a rough couple of years.

So… is value dead? Should we all just buy the S&P 500 and be done?

The rumors of value’s death have been greatly exaggerated. Larry Swedroe wrote am excellent piece on the subject this month, Don’t Give Up On the Value Factor, and I’m going to publish a few excerpts below.

As the director of research for Buckingham Strategic Wealth and The BAM Alliance, I’ve been getting lots of questions about whether the value premium still exists. Today I’ll share my thoughts on that issue. I’ll begin by explaining why I have been receiving such inquiries.

Recency bias – the tendency to give too much weight to recent experience and ignore long-term historical evidence – underlies many common investor mistakes. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high).

A great example of the recency problem involves the performance of value stocks (another good example would be the performance of emerging market stocks). Using factor data from Dimensional Fund Advisors (DFA), for the 10 years from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Value stocks’ cumulative underperformance for the period was 23%. Results of this sort often lead to selling.

Charles here. Other than perhaps overconfidence, recency bias is probably the most dangerous cognitive bias for the vast majority of investors. Investors look at the recent past and draw the conclusion that this is “normal” and representative of what they should expect going forward. This is why otherwise sane people do crazy things like buy tech stocks in 1998, Florida homes in 2005 or Bitcoin in late 2017.

Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. According to DFA data, the annual standard deviation of the premium, at 12.9%, is 2.6-times the size of the 4.8% annual premium itself (for the period 1927 through 2017).

As further evidence, the value premium has been negative in 37% of years since 1926. Even over five- and 10-year periods, it has been negative 22% and 14% of the time, respectively. Thus, periods of underperformance, such as the one we’ve seen recently, should not come as any surprise. Rather, they should be anticipated, because periods of underperformance occur in every risky asset class and factor. The only thing we don’t know is when they will pop up.

Well said.

After a period like the past ten years, it’s easy to draw the conclusion that value is dead. But investors drew the same conclusion in 1999… and they were dead wrong.

]]>http://charlessizemore.com/is-value-dead/feed/1The Best Stocks for No-Doubt Dividendshttp://charlessizemore.com/the-best-stocks-for-no-doubt-dividends/
http://charlessizemore.com/the-best-stocks-for-no-doubt-dividends/#respondThu, 26 Apr 2018 11:55:49 +0000http://charlessizemore.com/?p=13672The following is an excerpt from The 10 Best Stocks to Invest In for No-Doubt Dividends, originally published on Kiplinger’s. The legendary George Soros would reportedly reshuffle his portfolio whenever he would get back spasms. Whether it was his subconscious mind’s way of telling him he needed to make portfolio changes… or simply ridiculous superstition… […]

The legendary George Soros would reportedly reshuffle his portfolio whenever he would get back spasms.

Whether it was his subconscious mind’s way of telling him he needed to make portfolio changes… or simply ridiculous superstition… Soros would reverse his speculative bets whenever his back would flare up on him. And frankly, given the man’s track record, who are we to question his reasons?

Well, I don’t claim to have Soros’ intuition, though I will point out that I had major back spasms in late January, shortly before the market peaked and started a nasty correction.

I’m certain this was due far less to premonition and far more to me being over 40 yet trying to roughhouse with my kids like I’m still in my 20s. But either way, I did end up taking a little risk off the table.

I did not, however, sell my most reliable dividend payers. Stocks rise, and stocks fall. But a reliable dividend payer will continue to deliver the goods through good markets and bad, dropping cash into your pocket with every passing quarter.

Today, we’re going to look at 10 companies you can depend on to consistently pay and raise their dividends through bull and bear markets alike.

Warren Buffett has said on more than a few occasions that you should only buy stocks you’d be perfectly happy to hold if the market shut down for 10 years. These are those kinds of stocks. If the market were to close tomorrow, you’d continue to collect the dividend indefinitely.

Not all of these stocks are exceptionally high yielding. In fact, a high yield is often (though certainly not always) a sign of trouble. But most will generally pay a yield that, at the very least, is competitive with what you’d find in the bond market and have long histories of raising their dividends over time. These are stocks you can credibly stake your retirement on.

It might seem a little odd to include an oil and gas MLP in a list of “no doubt” dividend payers given some of the turmoil the industry has faced in recent years. Starting in 2015, some of the largest and best known pipeline operators – including Kinder Morgan (KMI), the granddaddy of them all – had to slash their distributions due to a lousy energy market and tightening credit conditions.

As a Texan, I feel I have license to poke fun of my own kind. And many of the pipeline operators (virtually all of which are based in Texas) really lived up to the reputation of Texas oilmen as gun-slinging risk takers. They borrowed far too heavily to aggressively boost their distributions and allowed their operations to become too heavily impacted by the price of crude oil.

Well, let me emphasize that Enterprise Products is not one of those companies. In an industry dominated by cowboys, EPD is a pillar of prudence and stability. Rather than try to dazzle investors with unsustainably high distribution growth, EPD chose to play it cool and raise its distribution 5% – 6% per year over the past decade. And unlike most of its peers, the stability of its distribution never came under serious question.

At current prices, EPD yields about 6.6%, which is exceptionally high for this stock. I also don’t expect those yields to be on offer for long, as value investors seem to be swooping in after a rough first quarter.

I happen to be one of those value investors; I’ve been buying the dips throughout 2018.

]]>http://charlessizemore.com/the-best-stocks-for-no-doubt-dividends/feed/0Presentation: Is the Bull Market Over? Or Just Taking a Pause?http://charlessizemore.com/presentation-is-the-bull-market-over-or-just-taking-a-pause/
http://charlessizemore.com/presentation-is-the-bull-market-over-or-just-taking-a-pause/#respondFri, 20 Apr 2018 01:13:49 +0000http://charlessizemore.com/?p=13659The following is an excerpt from a presentation I gave this week:

]]>http://charlessizemore.com/presentation-is-the-bull-market-over-or-just-taking-a-pause/feed/0Keeping Perspective: Julian Robertson’s Last Letter to Investorshttp://charlessizemore.com/keeping-perspective-julian-robertsons-last-letter-to-investors/
http://charlessizemore.com/keeping-perspective-julian-robertsons-last-letter-to-investors/#commentsWed, 11 Apr 2018 13:56:11 +0000http://charlessizemore.com/?p=13652Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value. Value stocks in general underperformed, and the […]

]]>Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value.

Sector

Benchmark

Qtr. Return

Large-Cap Growth

S&P 500 Growth

1.58%

Large-Cap Stocks

S&P 500

-1.22%

International

MSCI EAFE Index

-2.19%

Utilities

S&P 500 Utilities

-3.30%

Large-Cap Value

S&P 500 Value

-4.16%

Real Estate Investment Trusts

S&P U.S. REIT Index

-9.16%

Master Limited Partnerships

Alerian MLP Index

-11.22

Value stocks in general underperformed, and the cheapest of the cheap — master limited partnerships — got utterly obliterated.

So, is value investing dead?

Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is the Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent. Our compound rate of return to partners during this period after all fees was 31.7 percent. No one had a better record.

Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.

And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent, regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.

The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess. [Charles here. Sound familiar? Fear of trailing the benchmark has led managers to pile into the FAANGs.]

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.

No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.

For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.

Charles here. The more things change, the more they stay the same. Value will have its day in the sun again, and that day is likely here with the FAANGs finally starting to break down.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Consider the outperformance of value over growth in the years between the tech bust and the Great Recession:

So, don’t abandon value investing just yet. If history is any guide, it’s set to leave growth in the dust.

]]>http://charlessizemore.com/keeping-perspective-julian-robertsons-last-letter-to-investors/feed/1Do We Really Need More ETFs?http://charlessizemore.com/do-we-really-need-more-etfs/
http://charlessizemore.com/do-we-really-need-more-etfs/#respondWed, 04 Apr 2018 17:48:59 +0000http://charlessizemore.com/?p=13639Tadas Viskanta continued his Blogger Wisdom series by asking “What ETF, if it were launched tomorrow, would you invest in with little (or no) hesitation? Said another way what asset class or strategy is not currently effectively available in an ETF wrapper?” Here was my answer: “Frankly, there isn’t one. We arguably have a bubble […]

]]>Tadas Viskanta continued his Blogger Wisdom series by asking “What ETF, if it were launched tomorrow, would you invest in with little (or no) hesitation? Said another way what asset class or strategy is not currently effectively available in an ETF wrapper?”

Here was my answer: “Frankly, there isn’t one. We arguably have a bubble in ETFs, indexing in general, and even in smart beta.”

I seem to be echoing the sentiments of several of the other contributors:

Robin Powell: “I’m quite happy with my family’s portfolio as it is. It would be refreshing to have a day without another ETF launch!”

Tom Brakke: “I have no idea. There are too many already. The industry machine is at work cranking them out.”

Cullen Roche: “Nothing. The ETF market is becoming saturated. Most of the new strategies are gimmicky nonsense being sold to people who think they need something they don’t.”

I have to say though, Phil Huber’s tongue-in-cheek reply might have been my favorite:

While it may seem like there is nothing new under the sun in ETF land, there is one glaring hole when it comes to product development and that is an ETF that capitalizes on the most consistently accurate contrarian indicator known to mankind – Dennis Gartman.

The Inverse Gartman ETF (Proposed Ticker: WRNG) would provide investors a transparent, rules-based way to take the opposite bet of whatever Gartman is bullish or bearish on that week on CNBC.

]]>http://charlessizemore.com/do-we-really-need-more-etfs/feed/0Finance Blogger Wisdom: What Did the Last Ten Year Teach Us?http://charlessizemore.com/finance-blogger-wisdom-what-did-the-last-ten-year-teach-us/
http://charlessizemore.com/finance-blogger-wisdom-what-did-the-last-ten-year-teach-us/#respondTue, 03 Apr 2018 14:09:42 +0000http://charlessizemore.com/?p=13635Our esteemed panel of finance bloggers weigh in today and what they have learned in the ten years since the great financial crisis. https://t.co/DFePg9xsxC image: https://t.co/BvOuXmJ5ka pic.twitter.com/tY8jVnAIMh — Tadas Viskanta (@abnormalreturns) April 3, 2018 Continuing his annual Finance Blogger Wisdom series, Tadas Viskanta of Absolute Returns asks: Ten years have passed since the onset of […]

Continuing his annual Finance Blogger Wisdom series, Tadas Viskanta of Absolute Returns asks: Ten years have passed since the onset of the financial crisis. What about the past decade has changed your thinking about the economy, financial markets or investing?

This was my answer:

Value investing works, but applying a value strategy without some kind of momentum filter is a recipe for frustration because cheap stocks can stay cheap for a long time in the absence of a catalyst. You don’t necessarily need to know the catalyst ahead of time. Simply waiting for a cheap stock to resume some kind of modest uptrend will save you a lot of grief. This has been a decade in which growth has absolutely thrashed value.

]]>http://charlessizemore.com/finance-blogger-wisdom-what-did-the-last-ten-year-teach-us/feed/0Finance Blogger Wisdom: What’s a Reasonable Estimate for Portfolio Returns Going Forward?http://charlessizemore.com/finance-blogger-wisdom-whats-a-reasonable-estimate-for-portfolio-returns-going-forward/
http://charlessizemore.com/finance-blogger-wisdom-whats-a-reasonable-estimate-for-portfolio-returns-going-forward/#respondMon, 02 Apr 2018 15:20:01 +0000http://charlessizemore.com/?p=13629Tadas Viskanta, editor of the excellent finanical blog Abnormal Returns, asked a group of financial bloggers the following question: Assume you are advising a pension fund, endowment or foundation. What is a reasonable long-term expectation for real returns for a well-diversified portfolio? The answered varied, but it seems like the consensus was somewhere in the […]

]]>Tadas Viskanta, editor of the excellent finanical blog Abnormal Returns, asked a group of financial bloggers the following question:

Assume you are advising a pension fund, endowment or foundation. What is a reasonable long-term expectation for real returns for a well-diversified portfolio?

The answered varied, but it seems like the consensus was somewhere in the ballpark of 2%-3%, though some had estimates of 5% or better.

This was my response:

We all know the standard answer: stocks “always” return 7% to 10% per year. But while that might be true over a 20-30-year time horizon, the reality can be very different over shorter time horizons.

At today’s valuations, the S&P 500 is priced to actually lose 2%-3% per year over the next eight years. That estimate is based on historical CAPE valuations, which have limitations (including the failure to take into account differences in interest rates over time). So, let’s assume the CAPE is being unduly bearish given today’s yields and that stock returns end up being 5% better than the CAPE suggests. We’re still looking at returns of 2%-3%.

That’s roughly in line with with the yields you can achieve on a high-quality bond portfolio. So, core assets should return something in the ballpark of 2%-3% per year over the next 8-10 years. Overseas (and particularly emerging market) stocks might do significantly better than that, and commodities might enjoy a good decade starting at today’s prices. So, a diversified portfolio that included emerging-market stocks and commodities might post respectable returns. But a standard 60/40 portfolio is unlikely to return better than about 3% over the next 8-10 years.